Recently in Attorneys' Fees and Ethics Category

The Wall Street Journal notes a particularly interesting case out of federal bankruptcy court in North Carolina, where Judge Roy Hodges handed down a decision that strikes a blow against deceptive practices in asbestos litigation.

Garlock Sealing Technologies,a manufacturer of gaskets and packing,entered into bankruptcy in 2010 under the weight of pending and future asbestos claims. When manufacturers like Garlock file Chapter 11 in the face of asbestos claims, these firms are granted immunity on the condition that they meet a number of requirements. Among these requirements is the establishment of an asbestos trust, which establishes payments to be made to past and future victims based on the severity of their illness.

In this case, plaintiff's attorneys demanded that Garlock set aside 1.3 billion dollars for the settlement of mesothelioma related claims. Garlock believed the figure should be much lower, and earlier this month, federal judge Roy Hodges agreed, reducing their liability 90 percent, to 125 million dollars. This is significant, because for years, critics of this system have pointed out an exploitable information gap between the legal system and the trusts. In his opinion, Judge Hodges criticized the plaintiff's attorneys and their methods, noting that the larger number of 1.3 billion dollars was based on various forms of deceit by plaintiff's lawyers and clients, including the deliberate concealment of evidence that might suggest that plaintiff's injuries were the result of exposure to products other than Garlock's asbestos lined gaskets. The Journal notes one particularly poignant incident illustrating the extent of plaintiff misconduct:

Garlock had paid $9 million dollars in a California case involving a former Navy machinist mate. Garlock had attempted to show that the plaintiff had been exposed to asbestos-containing insulation, Unibestos, made by Pittsburgh Corning. The plaintiff denied exposure to insulation products, while his lawyer told the jury there was no Unibestos insulation on the ship. But Judge Hodges found that after the $9 million dollar verdict, the lawyers for the machinist filed 14 claims with other asbestos trusts, including several against insulation manufacturers. The same lawyers who told the Garlock jury there was no Unibestos exposure had claimed in the Pittsburgh Corning bankruptcy that the same plaintiff had been exposed to Unibestos. Judge Hodges wrote that the plaintiffs lawyers "failed to disclose" in court that their client had been exposed to 22 other asbestos products.

The Garlock case is a textbook instance of double dipping, a practice common in the asbestos litigation world. For years, critics of the system have alleged that plaintiff's attorneys "double dip," making claims to multiple asbestos trusts for the same injury. In this case, plaintiff's attorneys distorted or withheld facts while making claims with multiple asbestos trusts, even making allegations that were, as noted above, wholly inconsistent with the basis for rewards in prior decisions. As expected, companies forced into bankruptcy have decided to take action. Prior to this decision, EnPro Industries, Garlock's parent company, filed suit against four prominent asbestos law firms alleging they had concealed evidence about exposure to other products in litigation against Garlock. Judge Hodges' opinion provides significant ammunition for this claim.

The verdict is viewed as a major victory for Garlock, and is not without its critics. Paul Barrett of Bloomberg notes that the decision "obfuscates the long term wrongdoing by companies that didn't swiftly own up to the unintended harm caused by asbestos," while acknowledging that the circumstances present evidence that "influential members of the plaintiff's bar have lost their moral bearings."

It's not just companies like Garlock who have taken note. Congress, in an effort to solve the double dipping problem recently moved on the issue. In November, the House passed H.R. 982, the Furthering Asbestos Claim Transparency (FACT) Act, by a vote of 221 to 191. As BusinessWeek notes, the bill would require asbestos trusts around the country to file quarterly reports about who receives payments and how much they get. The bill is specifically designed to limit double dipping, and ensure that funds set aside for legitimate claims aren't unjustly dispersed to fraudulent claimants.

The purpose of allowing the people to petition their government for a redress of grievances is to ensure that those who have been wronged have the means to obtain compensation for the harm caused. Within this context, the debate over what constitutes "fair" compensation generally turns on two general considerations; namely, 1) whether the plaintiffs who seek a redress have legitimate claims and 2) if so, whether their accrued compensation is justified on the facts and circumstances of the case. Increasingly, the legislative and judicial systems have experienced burgeoning problems in dealing with the legitimacy of both factors.

To this end, Mark Behrens, Cary Silverman, and Christopher Appel of the legal firm Shook, Hardy, & Bacon L.L.P. have authored two important pieces. In terms of whether plaintiffs have legitimate claims, Behrens and Appel write in an op-ed for the National Law Journal that medical monitoring claims have increasingly been utilized by plaintiffs to try and obtain redress without the requisite injury-in-fact necessary to have standing. They laud courts that have attempted to restrict payments for injuries that may or may not occur, often at the expense of those truly harmed:

Suppose you have been exposed to a product that may increase your risk of a disease. You presently have no injury, but you are concerned that you could develop a disease in the future. Should the person who created the situation or made the product associated with the risk pay for you to obtain periodic medical testing?

Courts have come to different conclusions. Most courts over the past 20 years have said no to medical monitoring claims. Since 2000, these include the Supreme Courts of Alabama, Kentucky, Michigan, Mississippi, Nevada and Oregon. A few courts, however, recently have allowed medical monitoring claims in some situations, including the highest courts of Missouri in 2007, Massachusetts in 2009 and Maryland last year.

To the surprise of many in the plaintiffs' bar, a majority of New York's highest court recently joined the list of courts that have said no to medical monitoring for asymptomatic claimants. The New York Court of Appeals said that awarding medical monitoring to those individuals can threaten recoveries for the truly sick and lead to administrative nightmares and public policy judgments that are better left to the legislature.

The New York Court of Appeals reached the right conclusion. For over 200 years, one of the fundamental principles of tort law has been that a plaintiff cannot recover without proof of a physical injury. This bright-line rule may seem harsh in some cases, but it is the best filter courts have developed to prevent a flood of claims, provide faster access to courts for those with reliable and serious claims, and ensure that the sick will not have to compete with the nonsick for compensation.

As to the legitimacy of accrued compensation, Behrens, Silverman, and Appel write in the Wake Forest Law Review that courts are misrepresenting the ratio of actual or potential damage to punitive damages by including extra-compensatory damages that skew the ratio downwards, ostensibly making it seem valid:

Whether extracompensatory damages are considered in the ratio calculation has constitutional and practical significance. For example, if a jury awards a modest $50,000 in actual damages but $1 million in punitive damages, the resulting 20:1 ratio would far exceed the presumptive single-digit ratio limit expressed by the U.S. Supreme Court. But, if the court adds an additional $200,000 in attorney fees to the compensatory damages denominator, the double-digit ratio drops to 4:1 and is less constitutionally suspicious. Inclusion of prejudgment interest, which is set at statutory rates in some states that far exceed inflation, can have an even more significant effect on the constitutional calculus. For example, an Oklahoma appellate court upheld a $53.6 million punitive damage award where actual damages were $750,000; the award included $12.5 million in prejudgment interest to reach a 4:1 ratio. Without prejudgment interest, the 70:1 ratio between the punitive and actual harm damages should have led to a different result.

They theorize that the true ratios (minus the extra-compensatory damages) may be a presumptive violation of due process. If we accept these issues as inherently dangerous to the health of the judicial system, then there needs to be action taken in terms of mitigating the potential damage to defendants. If no action is taken, the chances of truly-deserving plaintiffs receiving compensation goes down and the administrative costs on the court and defendants go up. If defendants are then unable to cover the cost of legitimate claims, the result is no redress for the plaintiff and significant financial harm or bankruptcy for the defendant. It becomes self-evident, then, that if the scales of justice tip increasingly in favor of one party, both parties ultimately suffer.

Following on the heels of its passage of the FACT Act last week, the House took up the issue of lawsuit abuse more broadly:

On Thursday, November 14, the Lawsuit Abuse Reduction Act (LARA), H.R. 2655, was passed by the U.S. House of Representatives on a 228-195 vote. LARA is designed to curb the filing of frivolous lawsuits by restoring mandatory sanctions (e.g. payment of attorney fees) where a court determines a claim to be frivolous. It would amend Rule 11 of the Federal Rules of Civil Procedure to provide for mandatory sanctions and also eliminate the "safe harbor" provision which currently allows parties to withdraw a frivolous claim within 21 days without consequences.

From a procedural standpoint, this bill would streamline the Rule 11 process by delineating a bright-line rule for remedies if a claim is deemed frivolous. This would allow for increased judicial economy in the decision-making process, because judges would not have to spend additional time determining whether sanctions are appropriate for a given case. Instead, the focus would shift strictly towards determining the appropriate size and scope of the sanctions.

From a substantive standpoint, the Rule 11 reform would create greater certainty of consequences for the claimant. Because the claimant knows that an initial ruling that a claim is frivolous leads to mandated sanctions, the subjectivity of the judge's view on whether sanctions should be applied becomes irrelevant.

At the same time, because the judge retains subjectivity as to the breadth of the sanctions, the claimant does not have the variables necessary to measure whether it still might be worth it to bring a claim or group of claims. As a result, the claimant would naturally be reluctant to bring a substandard claim in the first place, especially because the removal of the safe harbor provision would make it even riskier to do so.

In the midst of the myriad political battles going on in Washington, there is some good news:

On Wednesday, November 13th, the Furthering Asbestos Claim Transparency (FACT) Act, H.R. 982, was passed by the U.S. House of Representatives on a 221-199 vote. The FACT Act is designed to curb fraud and abuse in asbestos litigation by addressing the problem of false and/or inconsistent claims submitted to asbestos bankruptcy trusts and in the civil justice system.

The legislation would amend federal bankruptcy law to require asbestos bankruptcy trusts to submit quarterly reports to the overseeing bankruptcy court which detail each demand made against the trust by a claimant. The Act would, therefore, provide a link between the separate personal injury compensation systems of the bankruptcy trusts and the civil justice system.

The House's passage of the bill serves as an admirable first step in redirecting trust funds to those who are rightfully entitled to them. The Senate should take this signal from the House and pass the bill with all deliberate speed. The interests of the plaintiffs' bar cannot take precedence over justice for aggrieved individuals with legitimate claims. The interests of commerce and the worker are in perfect alignment. The only loser here would be those lawyers who can no longer make fraudulent claims and get away with it.

One of our fundamental rights as citizens is the ability to seek redress of our grievances. Over time, this practice spread from government to private industry, as workers' rights against their employers in abusive or harmful situations were codified in legislation.

The establishment of the asbestos bankruptcy trust was meant to offer a compromise path through which employees could achieve restitution for their asbestos-related injuries, and employers could avoid cost overruns and premature bankruptcies.

However, the surreptitious manner in which the trusts have been run has allowed for opportunistic lawyers to take advantage of them by submitting frivolous, fraud-riddled claims.

The goal of the trusts stand as the fulfillment of just compensation for injured workers, but the main beneficiaries are turning out to be lawyers who make claims on behalf of "clients."

To remedy this injustice, the FACT Act was meant to mandate quarterly reporting of claims made on the trust, as well as allow for more compliance with third-party discovery requests made on the trust.

Because there are no compliance costs or other significant burdens associated with the law's passage, we can assume the asbestos industry's opposition to the FACT Act stems from a desire to lessen transparency. If there is no transparency, the industry can continue to make baseless claims and reap fraudulent profits.

Lisa A. Rickard, president of the U.S. Chamber Institute for Legal Reform, has written an op-ed detailing the reasons for the asbestos industry's continued obfuscation.

Floyd Norris, author of the High & Low Finance column for the New York Times, writes about two cases the Supreme Court has decided to hear dealing with fee-shifting in patent infringement cases. The outcomes could potentially deter future, frivolous infringement suits.

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FACTA—which calls for statutory damages for printing too much information on credit card receipts—is perhaps the statute with the most abusive class action settlements, because notice rarely reaches class members and thus no one objects when the attorneys rip off the class. If a district court doesn't engage in its duty to protect class members, attorneys can walk away with windfalls while accomplishing next to nothing for their putative clients.

$742.50 in cash and face value of tickets (surely mostly all tickets) to class members
$2,500 each to two class reps
$190,000 in attorneys' fees and expenses.

And the attorneys—Armstrong Law Firm, Bock Law Firm, LLC, and Chant and Co.—had the temerity to request over $400,000 in fees before the judge reduced it to something more than 200 times the class benefit. The class representatives got nearly seven times what the class got.

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At first glance, the Korean Air Passenger Settlement looks pretty good: $50 million in cash for class members. You have to dive very deep in the papers to find out that the attorneys are going to ask for $21.5 million of that cash. They justify this by valuing coupons with face value of $36 million at $36 million, but we know from the Class Action Fairness Act and In re HP Inkjet Printer Litig. that you're not allowed to do that. Tsk, tsk. (And, of course, 25% is likely excessive even if the settlement was worth $86 million, given that the lawsuit just piggybacked on a government antitrust investigation. But, of course, the court is never going to hear that unless a class member comes forward and objects, or retains counsel (perhaps pro bono counsel?) to represent them at the fairness hearing.

The class consists of:

All persons and entities (excluding governmental entities, Defendants, and Defendants' respective predecessors, subsidiaries, and affiliates) who purchased Passenger Air Transportation on [Korean Air or Asiana Airlines], or any predecessor, subsidiary, or affiliate of the Defendants, at any time
during the time period January 1, 2000 through August 1, 2007. As used in this definition, "affiliates" means entities controlling, controlled by, or under common control with a Defendant [and does not include travel agents]. "Passenger Air Transportation" means passenger air transportation service purchased in the United States for flights originating in the United States and ending in the Republic of Korea ("Korea") or flights originating in Korea and
ending in the United States.

There is a claim form online if you want your cash and coupons; class members should get formal notice shortly.

One of the lead class counsel is Jeff Westerman, who you might remember from his Milberg days for his role in the NVIDIA settlement bait-and-switch where he hired an expert witness to testify against letting class members recover what the settlement notice told them they'd recover. So one is skeptical when one reads in the settlement that "Korean Air and Class Counsel shall set the maximum coupon redemption value per ticket by mutual agreement."

You may recall the Ninth Circuit throwing out a bad settlement (in an opinion later modified) over Frosted Mini-Wheats that paid $800,000 to consumers, $2 million to lawyers, and some unknown figure to unknown cy pres. On remand, the parties set up a $4 million settlement fund—but $900,000 or so is earmarked for settlement administration. Is that a $4 million settlement, or is it really a $3.1 million settlement, because that's all the class can hope to get? Class counsel is "only" seeking $1 million this time, which is still disproportionate to actual class relief; meanwhile, the objectors who turned the $800,000 in class relief into over $2 million of class relief aren't being given anything. This morning, I'll be at the fairness hearing in San Diego, presenting the CCAF objection of Chicago Law professor Todd Henderson. (As always, CCAF is not affiliated with the Manhattan Institute.)

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We've been following this case for years. An intermediate appellate court threw out the verdict against attorneys who stole from the settlement fund based on a later-discredited and -disclaimed affidavit from Ken Feinberg; the Kentucky Supreme Court ruled that that affidavit didn't create a factual dispute, but simply opined on legal issues that the lower court correctly disregarded. Further litigation is still pending against Stan Chesley. The opinion doesn't appear to be online yet. [Courier-Journal; earlier on Point of Law; 2007 summary]